Volume 115: Re-Building Marketing For Profit Not Growth?
1. Re-building Marketing For Profit, Not Growth?
tl;dr: Where next marketing, as priorities shift?
I have many concerns with brand valuation, most of which center on the fact that every methodology is essentially a game of Jazz Hands. No matter the fancy math, subjective scoring makes up the foundations, which leads to wildly differing outputs and huge error rates hidden in the small print. This is likely why Interbrand and Kantar BrandZ, both gold-standard methodologies, differ by as much as 13X in their valuations of the same brand, based on the same publicly available data (Specifically Visa in this case.) I could be catty and suggest that Visa must be a Kantar client (they value it at $191bn) and not an Interbrand one (they value it at $15bn) since client status appears to be the most significant factor in valuation theater. But I won’t.
However, another challenge implicit in brand valuation is that it’s tough to separate between the pricing power created by brand strength and the pricing power created by having a monopolistic position in your market. This is why I often joke that the Interbrand Best Brands list should really be called the Biggest Monopolists list.
Usually, this doesn’t much matter unless you’re a government regulator or the kind of executive likely to hire Interbrand or Kantar to value your brand, but in these times of high inflation and impending recession, it really matters.
I’m not well enough equipped as an economist to be anything other than dangerous in any discussion of inflation, but I have been observing an interesting phenomenon on earnings calls recently: CEOs excitedly discussing their ability to pass on large price increases to the consumer, which has markedly increased their profitability. (Fascinatingly, the CEOs of both Kroger and Albertsons have bragged on recent earnings calls about how their scale enables them to lift prices and profitability. Yet the same CEOs claim their planned merger to create a grocery behemoth won’t lift consumer prices. Hmmm, is that because it’s true or because it’s illegal to admit that a market-consolidating merger will lead to higher prices? You decide for yourself, but I know what years of merger data says)
Here’s the question, though. As we approach a 100% chance of recession next year, how much pricing power in tough times will be due to brand strength driven by marketing activities, and how much will be due to monopolistic effects driven by market consolidation? A question that really matters if you’re in the branding and/or marketing business.
Over the past dozen or so years, money was essentially free, with interest rates sitting at zero in most countries and negative in some. As a result, capital flowed like water in search of a return. This put unprecedented emphasis on growth over profits because when money is free, markets deem profitability unnecessary, thus turning growth into the primary driver of company valuation (in other words, the faster and bigger you grew, the more valuable your company became, and the more likely investors, especially early investors, would make bank)
This had a direct knock-on effect on brands, branding, and marketing of all stripes. Rather than viewing marketing, branding, etc., as a vehicle for creating profits by establishing and maintaining a price premium, the business world pivoted toward growth, which happened to coincide with the digital transformation of marketing, which leaned heavily into this focus to drive a wedge between what the ad-tech industry labeled “traditional” versus “digital” marketing (A false distinction created solely to peddle ad-tech and mar-tech products.)
As a result, we saw a huge rise in programmatic price promotion-driven advertising activities, rather cutely labeled “performance marketing” (it’s called this because you pay for it based on a measure of performance, like a click, not because it performs more highly than any other form of advertising. But, holy shit, it’s a masterclass in how a name can drive perceptions.)
This led to a whole new focus on efficiency-driven advertising metrics like ROI, CAC, ROAS, etc. (excellent piece on the dubious value of ROAS here)
It also had a significant impact on pricing. If the overall economy is only growing at 2-3%, how will you achieve excess growth rates over enough quarters to spike your company valuation into the stratosphere? Well, put simply, price. If you vastly undercut on price because you’re subsidized by free money, it’s the single most guaranteed driver of growth. It’s why Uber, for years, undercut the pricing of taxi firms. Yes, it’s more convenient, and it’s a well-put-together digital product and suchlike, but the growth of Uber was because it was cheap. So cheap that for every ride taken, Uber, to this day, still loses money. That’s right, as Uber grew its business, it never made a cent in profit; it just radically scaled its losses. (This is why Uber today has become expensive and why it’s adding as many ad products as possible in a desperate attempt to achieve profitability, as the fantasy fiction of its financial reporting ain’t cutting it with the markets anymore)
So, how do you shift entire businesses from a focus on efficient customer acquisition for growth to a focus on profitability? Well, think of the analogy of turning a supertanker and apply it to the universe of branding, marketing, and business models. Everything built over the past twelve years, all these metrics, and a vast swathe of the digital marketing landscape is focused on efficiently acquiring customers rather than profit maximization, even as the business landscape has turned 180 degrees. None of the above metrics, for example, even touch on the ability to command a price premium, achieve excess margins, or anything that helps put more money into the company coffers. Instead, the focus has narrowed to how cheaply marketing activities add new customers, often via a discount. (Not to mention that a blinkered focus on efficiency also hinders growth as you fail to invest in more costly to acquire customers).
As we move forward, it will be particularly interesting to see how this plays out. Growth-driven companies that price extremely low–often below cost–and where the entire marketing infrastructure has been built to acquire customers cheaply, often by utilizing further discounting, are likely to be in exceptionally deep trouble.
When the advertising world rolls out the recession playbook, the primary message is always “don’t stop spending on ads.” And, even though this is self-serving on their part, there’s some truth in this. If you can afford to, you shouldn’t stop spending because we know the brands that maintain or even increase their share of voice tend to accelerate out of recessions more quickly than their peers. However, the difference between our upcoming recession and previous recessions is that we’re also shifting from a world of free money to a world where money is costly, which puts a premium not only on maintaining share of voice but also on maintaining prices because we no longer have access to ultra-cheap debt or the increasingly shallow pockets of Softbank.
So, this time, the recession playbook shouldn’t just be “don’t stop spending on ads,” but also “retain brand strength to maintain pricing power” and “don’t fall into the trap of discounting to drive sales unless you have absolutely, positively, no other option.”
Here’s why. Discounting has a compounding effect. If you sell a product for one dollar and make a 10% profit, you make 10c per sale. If you discount that product by 10%, your profits don’t go down by 10%; they go down by 100% to zero. Your 10% discount on the sale price completely wiped out your profits because your costs stayed the same.
So, while we see CEOs being bullish on their ability to raise prices and increase profits today, the question remains about what happens tomorrow and which firms will be able to stick out a recession due to monopolistic power compared to those that will do so through brand strength.
Retail looks to have built up much excess inventory that will have to move eventually. Due to chip shortages, the automotive industry has been piling up cars it can’t sell. Ford alone sits on almost 50,000 vehicles it will need to sell. The previously red-hot DTC landscape looks distinctly chilly, as their entire go-to-market approach is deemed value destructive due to a structural lack of profits. Commercial office properties face a $1.1trn obsolescence challenge. And there’s an increasingly alarming number of zombie companies where revenues can no longer cover the rising cost of debt.
So, who will be the winners? Well, monopolists will do just fine. They’re likely to keep prices high, maintain profits, and then go bargain-hunting for less fortunate peers, thus creating a game of whack-a-mole for the FTC. Equally, well-run corporations with strong brands and a marketing infrastructure built for more than just efficiency will be OK. And the PE firms that built up vast stores of capital in the boom times will do just fine, as they snap up publicly traded bargains and take them private, likely rolling up DTC players, in a similar way that Durational Capital attempted with Casper.
For everyone else? Well, buckle up because the literal foundations of how marketing has been practiced over the past 12 years is about to change as profits are in and growth is out.
“May you live in interesting times” is an old Chinese proverb/curse. Well, we’ve got some interesting times ahead, that’s for sure.
2. Generational Nonsense.
tl;dr: Why is this even still a thing?
In a recent Morning Consult poll of the most popular brands among Gen Z, we saw two things:
The whole “Gen Z only wants to buy brands with a social or environmental purpose” thing now looks like the utter bullshit it always was. Number one on the list is Instagram, and number nine, Shein. This alone should tell you all you need to know; Instagram has been found legally culpable in teen suicide and is owned by the least ethical corporation on earth, while Shein is an environmental catastrophe credibly accused of using forced labor.
Of the ten, nine were apps or social platforms, and one was an extremely cheap fast fashion retailer. What do they all have in common? They’re either free or almost free. What do members of Gen Z have in common? Because of their stage of life (not unique to them as a generational cohort), members of Gen Z don’t have much money. In fact, of all the generational cohorts, Gen Z has by far the lowest income.
This brings me to two thoughts. First, and I’ve written about this before: generational segmentation should disappear and die already. There’s zero empirical evidence to support a fantastical idea that someone’s date of manufacture somehow dictates their purchase choices for life. All you need to support this are the following:
The people who literally wrote the book on generations utilized an appallingly bad methodology. In 2009, the Chronicle of Education described one of their more popular books “Millennials Rising” as a “hodgepodge of anecdotes, statistics, and pop-culture references” based on surveys of approximately 600 high-school seniors from Fairfax County, Virginia, an affluent suburb of Washington DC with a median household income twice that of the national average. In other words, everything you’ve ever read about Millennials was stereotyped nonsense based on a few interviews with a narrow band of high school kids from a wealthy American suburb.
The anecdotal Internet meme of King Charles and Ozzy Osbourne, both 73-year-old English men, isn’t wrong. Generationalists would claim many shared characteristics; a simple glance tells you otherwise. If you want data to prove it, BBH did the work and found that reading the same newspaper indicates group cohesion more than people with a shared date of manufacture.
And yet, marketers fetishize youth and treat Gen Z (and Millennials before them) as if they’re the only thing that matters, which is a bit weird in these so-called data-driven times. If we solely stick to a generational focus, you’d think Gen X, which has more than double the spending power of Gen Z, might matter more, or Boomers, who hold over 50% of the entire wealth in the country (in wealth terms, Gen Z isn’t even a blip on the radar).
You might have seen a report touting the $360bn disposable income “Gen Z opportunity.” Well, there are about 68m members of this cohort in the US, so $360bn averages to roughly $5k per person. I’m not saying that’s nothing, but it’s not a lot in relative terms.
Let me provide a real-world example to prove how odd this all ends up becoming and how intellectually dishonest stereotyping people based on age really is. Last year, I was asked to help pitch for the re-brand of a global hotel brand. Its average nightly price per room would wipe out the entirety of that $5000 in disposable income in about two weeks. In the brief, they used a nonsense McKinsey statistic on Gen Z spending power to support an intent to re-brand with a sole focus on the Gen Z consumer (I went down the rabbit hole, the original source was a subjective estimate by a small regional insurance company. Yeah, that’s right, those paragons of data at McKinsey were quoting a number with zero basis in fact. Why? Probably because it’s easier to sell consulting services if you tell people what they want to hear. Hmmm, shit. That must make me a bad consultant. Ah, well. I’d rather tell the truth).
It just made no sense. First, very little connects people born at the same time. Second, it’s frankly degrading to stereotype millions of people in this way, and third, only a tiny fraction of them could afford that hotel anyway. There’s no way they’d have landed there with even a cursory economic analysis, and the commercial implications are potentially stark. If it were possible to land a perfect “GenZ re-brand,” the most likely outcome for this hotel chain would be massive discounting to get closer to something the cohort could afford, not because they’re a unique generation, but because their stage of life means they don’t have any money.
Now, this was a pitch I was not on the winning team for. I’m OK with that. I knew we wouldn’t win it within about 30s of getting on the call. For years, pitches have moved from the BS dog and pony show of “impress me with your brilliance” toward a more two-way “let’s discuss the problem together and see if we click.” So, I knew we were toast when I started by asking questions only to receive a brick wall of “you tell me” responses. I detest the “impress me” rather than the “help me figure this out” mindset. But, to be honest, why should I have been surprised? If the entire basis of the job was so nonsensical as to fail a basic test of commercial competence, what else should we expect?
Anyway, an old pitch isn’t what inspired me to talk about this again. That was someone on LinkedIn saying, “Gen Z is a generation of contradictions.” Well, that’s about the only true thing that’s ever been said about Gen Z. You know why? Because every generation is a generation of contradictions. It’s the lone thing that binds everyone with a shared date of manufacture.